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This article first appeared in The Edge Financial Daily on March 26, 2019

Top Glove Corp Bhd
(March 25, RM4.48)
Maintain buy with a target price of RM4.95:
Top Glove Corp Bhd reported a net profit of RM105.8 million for second quarter of financial year 2019 (2QFY19), down 3.9% quarter-on-quarter (q-o-q) and 3% year-on-year (y-o-y). Meanwhile, quarterly revenue stood at RM1.16 billion, down 3.9% q-o-q, while up 21% y-o-y. For first half of FY19 (1HFY19), the group attained a higher top line (+27.7% y-o-y) and a flat bottom line (+0.6% y-o-y). Earnings were within our but below market’s expectations. Overall, 1HFY19 net profit accounted for 45.1%/42.9% of our/consensus full-year estimates.

A lower revenue was recorded mainly due to lower average selling price (ASP) from downtrend in raw material costs and pricing pressure, which offset a higher sales volume (+1% y-o-y). Meanwhile, weakening of the US dollar against the ringgit resulted in disappointing profit before tax (PBT)/PBT margin of -24.8%/-2 percentage points. The group achieved a stronger sales volume growth (+16% y-o-y) with a higher ASP, and further enhancements in quality and operational efficiency, resulting in a higher operating profit (+16.1% y-o-y). However, a lower profit after tax was recorded no thanks to higher tax expenses (reduction in tax allowance, expiry of special reinvestment allowance and higher deferred tax liabilities). Again, better sales volume (+18% y-o-y) and operational efficiency contributed to a higher revenue in 1HFY19. Despite that, a higher finance cost (RM38.5 million in 1HFY19 versus RM4.3 million in 1HFY18) was mainly incurred due to the acquisition of Aspion, which resulted in a flat net profit. The group will continue its expansion of existing facilities and the construction of new facilities, which will boost the total production line (+200 lines) and production capacity (+80.9 billion) by end of 2020. As such, the group is projected to have 848 production lines along with a production capacity of 80.9 billion per annum.

We envisage the group will have a flattish sales volume growth ahead due to potential oversupply from the rubber glove segment. As such, revenue will be flat unless there is growth from other new businesses (printing, chemical business and Aspion), in our view. On the other hand, we foresee a better profit margin in 2HFY19 due to a lower finance cost, as well as lower tax expenses thanks to unutilised tax allowance.

We slightly revise down our FY19 and FY20 forecast earnings by 6.4% and 5.3% respectively as we foresee weakening of the US dollar against the ringgit, coupled with lower sales volume growth. We maintain “buy” with a lower TP of RM4.95 after our earnings downgrade and strengthening of the ringgit against the US dollar. — JF Apex Securities, March 25

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